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The 3-0 decision by the U.S. Court of Appeals for the District of Columbia Circuit upholds a January 2010 decision by the FCC to close the so-called “terrestrial loophole” in its rules which has allowed cable operators to deny access to “must have” programming, like live sporting events, to competitors.

In Philadelphia, for example, Comcast Corp. withholds its Comcast SportsNet TV coverage of the Philadelphia Phillies, Flyers, and 76ers from DirecTV and Dish Network. In San Diego, AT&T Inc.'s television subscribers cannot watch Padres games, which are carried on a Cox Communications channel. In New York, Cablevision has denied Verizon Communications a high-definition version of a channel that shows Knicks and Rangers games. AT&T and Verizon have each filed complaints against the cable providers at the FCC.

In the opinion authored by Circuit Judge David Tatel, the court underscored the competitive disadvantages facing cable's rivals, particularly in Philadelphia, where access to sports programming is critically important to consumers.

“We doubt that Philadelphia baseball fans would switch from cable to an alternative MVPD [multichannel video programming distributor] if doing so would mean they could no longer watch Roy Halladay, Cliff Lee, Roy Oswalt, and Cole Hamels take the mound, even if they thought the alternative MVPD was otherwise superior in terms of price and quality,” the court wrote.

Cable Companies Have Exploited “Loophole.”

The issue stems from FCC rules implementing the 1992 Cable Act, which required cable operators to make all of its programming available to competitors over a “satellite” feed, which at the time was considered the primary way of transmitting television programming content. Since then, many cable companies, including Comcast, Cablevision, and Time Warner Cable, have distributed such programming over land-based, rather than, satellite connections.

Technological advancements since the enactment of the 1992 Cable Act have made delivering local and regional content over fiber-optic cable lines, or “terrestrial” feeds, much cheaper for the cable operators, but in the process have created a loophole in the commission's rules.

The FCC's order hinges on section 628(b) of the Communications Act, which makes it unlawful “for a cable operator…to engage in unfair methods of competition or unfair or deceptive acts or practices, the purpose or effect of which is to hinder significantly or to prevent any multichannel video programming distributor from providing satellite cable programming or satellite broadcast programming to subscribers or consumers.”

In challenging the FCC's decision, Cablevision argued that the FCC lacked the statutory authority to close the terrestrial loophole and that the agency's actions violated the First Amendment. The court disagreed. “Given section 628's broad language and purpose—promoting competition by restricting vertically integrated cable companies from denying their competitors access to popular programming networks—we see nothing in the statute that unambiguously precludes the commission from extending its program access rules to terrestrially delivered programming,” the opinion stated. “Nor do we see any merit in petitioners' contention that the commission's rules violate the First Amendment…”

One Part of Order Deemed ‘Arbitrary and Capricious.'

The court did, however, find fault with one aspect of the FCC's order. As the opinion noted, in addition to relying by analogy on the congressional judgment reflected in section 628(c)(2), the commission indicated that subsection “(c)(2)-like” acts involving terrestrial programming are unfair because such acts “have the potential to impede entry into the video distribution market and to hinder existing competition in the market.” The D.C. Circuit ruled that by labeling conduct unfair simply because it might in some circumstances “negatively affect competition in the video distribution market,” the commission failed to consider whether it should treat conduct as “unfair” despite it being “pro-competitive” in a given instance.

“Indeed, even though reducing prices amounts to paradigmatic legitimate competition, a cable operator's decision to cut its prices could conceivably qualify under the commission's reasoning as ‘unfair' under section 628(b) because of the theoretical ‘potential' for a cable operator to engage in predatory pricing to drive its competitors from the market,” the court explained.

Given the FCC's failure to “articulate a satisfactory explanation for its action” in defining certain acts of terrestrial withholding as “categorically unfair,” the court found this part of the order arbitrary and capricious.

“If the commission believes that conduct involving the withholding of terrestrial programming should be treated as categorically unfair, as opposed to assessing fairness on a case-by-case basis or perhaps adopting a public interest exception mirroring the one for satellite programming, then it must grapple with whether its definition of unfairness would apply to conduct that appears pro-competitive and, if so, whether that result would comport with section 628,” the court added.

Major Victory for Phone, Satellite Companies

The ruling is a major victory for the phone companies and satellite TV providers long denied access to cable-owned local and regional sports programming, especially for Verizon in New York and Philadelphia, where the company's fiber-to-the-premises FiOS network is in the throes of a major rollout.

“Today's decision clears the way for the FCC to promptly resolve pending program-access disputes and to ensure that the programming that is important to sports fans is available to them,” Michael E. Glover, senior vice president and deputy general counsel for Verizon, said in a statement.

DirecTV also welcomed the court's decision. “There is now no question that the FCC has the authority to prevent cable operators from exploiting that loophole to gain an unfair advantage over competing video programming providers,” the company said in a statement.

Cablevision Disappointed

While dealt a blow by the D.C. Circuit, Cablevision expressed some optimism that the court sent the matter of treating certain conduct involving exclusive terrestrial programming contracts as “categorically unfair” back to the FCC for reconsideration.

“Given the local and regional nature of terrestrial programming, such exclusives can be highly pro-competitive, particularly in markets like New York with as many as five video providers,” Cablevision said in a statement, commenting on the decision. “Verizon and AT&T, the nation's two largest phone companies, should be required to compete based on the quality of their products and not by manipulating federal law.”

The cable industry has long viewed the loophole as an incentive for companies to invest in regional sports networks.

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